The dark art of mortgages

[bbdp]

It might produce fits of laughter amongst some but I've recently discovered that i don't know how remortgaging works having been a homeowner for a number of years, but never having actually moved house!

I'm hoping someone can put me out of my misery and explain the difference between equity and a deposit for the next purchase since they seem to be the same thing to me (albeit that the equity is speculative based on how much you can sell your property for i guess)?

For example, if my house is worth £250k and i have an outstanding mortgage of £150k then i have £100k profit which can be applied as a deposit for the next mortgage....correct?

Or is it more sensible for me to be putting my pennies under the mattress so i have the £100k in cash to buy the next place?

[northernladuk]

Are you sure you are cut out for a mortgage?

[Power Mortgages Ltd]

It might produce fits of laughter amongst some but I've recently discovered that i don't know how remortgaging works having been a homeowner for a number of years, but never having actually moved house!

I'm hoping someone can put me out of my misery and explain the difference between equity and a deposit for the next purchase since they seem to be the same thing to me (albeit that the equity is speculative based on how much you can sell your property for i guess)?

For example, if my house is worth £250k and i have an outstanding mortgage of £150k then i have £100k profit which can be applied as a deposit for the next mortgage....correct?

Or is it more sensible for me to be putting my pennies under the mattress so i have the £100k in cash to buy the next place?

Hi bbdp,

That is correct, equity is what you have in your current property and deposit is what you will put down on your next purchase (if you are looking to buy a new property). If you are remaining in your current house and simply wish to get a better rate on your mortgage by possibly switching to a new lender then this is a remortage (it is not a remortgage if you intend to move property) and the rates available to you will depend upon your 'loan to value' - the amount you owe in relation to the value of the property. This shows as a percentage so if you owe £75,000 and your property is worth £100,000 your loan to value (LTV) is 75%. The remaining 25% is the equity you have.

If you are looking to move house and sell your property then the equity in your property acts as the deposit for the purchase of the new property. Therefore in the above example you would have £25k to put down as a deposit plus any cash you have saved up too.

Remember though that you will need to factor in the selling Estate Agent's fees (circa 1-2% of the price your sell your property for), stamp duty on the new property (1% for a purchase price up to £250k and 3% for a purchase price from £250k - £500k), legal fees to the solicitors (circa £2k - £2.5k if you are instructing them to deal with the sale of your property and purchase of the new property) and a valuation fee on the purchase of the new property (circa £500 but will largely depend upon the purchase price of the new property). You then have other costs like moving fees such as removal vans etc.

All of the above will have to come from either the equity in your current property, the cash you have saved up or a mixture of the two then whatever is left you can put down as the deposit on the new property.

Hopefully that helps?

Ben

[NickNick]

Remember though that you will need to factor in the selling Estate Agent's fees (circa 1-2% of the price your sell your property for), stamp duty on the new property (1% for a purchase price up to £250k and 3% for a purchase price from £250k - £500k),
Ben

I know you guys are the experts on all this and so I'm probably wrong, but I was under the impression that stamp duty was

0% up to 125K
1% 125-250K
3% 250 - 500K

https://www.gov.uk/stamp-duty-land-tax-rates

[Power Mortgages Ltd]

I know you guys are the experts on all this and so I'm probably wrong, but I was under the impression that stamp duty was

0% up to 125K
1% 125-250K
3% 250 - 500K

https://www.gov.uk/stamp-duty-land-tax-rates

Hi NickNick,

Yes you are right. I was assuming that they were not looking at a purchase price of less than £125k though (in which case there wouldnt be any stamp duty) so therefore they would have to pay 1% if the purchase price was up to £250k or 3% if it was from £250k to £500k.

[bbdp]

Hi bbdp,

That is correct, equity is what you have in your current property and deposit is what you will put down on your next purchase (if you are looking to buy a new property). If you are remaining in your current house and simply wish to get a better rate on your mortgage by possibly switching to a new lender then this is a remortage (it is not a remortgage if you intend to move property) and the rates available to you will depend upon your 'loan to value' - the amount you owe in relation to the value of the property. This shows as a percentage so if you owe £75,000 and your property is worth £100,000 your loan to value (LTV) is 75%. The remaining 25% is the equity you have.

If you are looking to move house and sell your property then the equity in your property acts as the deposit for the purchase of the new property. Therefore in the above example you would have £25k to put down as a deposit plus any cash you have saved up too.

Remember though that you will need to factor in the selling Estate Agent's fees (circa 1-2% of the price your sell your property for), stamp duty on the new property (1% for a purchase price up to £250k and 3% for a purchase price from £250k - £500k), legal fees to the solicitors (circa £2k - £2.5k if you are instructing them to deal with the sale of your property and purchase of the new property) and a valuation fee on the purchase of the new property (circa £500 but will largely depend upon the purchase price of the new property). You then have other costs like moving fees such as removal vans etc.

All of the above will have to come from either the equity in your current property, the cash you have saved up or a mixture of the two then whatever is left you can put down as the deposit on the new property.

Hopefully that helps?

Ben

Thanks Ben. Glad to hear my assumptions are right, i just need to do a better job and use the right terms! Ive knocked up a quick spread sheet to take into account legal fees, estate agent fees, moving costs, etc so will start planning the move now.
Thans again for your help.

[jmo21]

It's only called a deposit, if you use it as a deposit

HTH.